Draft law to change share buy-back tax rules for listed public companies

18 November 2022

In Brief

On 17 November 2022, Treasury released for consultation an exposure draft law that seeks to implement the Government’s October 2022-23 Federal Budget announcement concerning the tax treatment of buy-backs undertaken by listed public companies.  

As expected, the proposed law: 

  • seeks to ensure that the current tax rules for off-market buy-backs (which allow for part of the buy-back price to be treated as a franked dividend for tax purposes) are no longer available to listed public companies - thereby ending the practice of discounted off-market buy-backs for those companies; and 
  • applies to off-market buy-backs announced to the market by listed public companies after 7:30pm, by legal time in the Australian Capital Territory, on 25 October 2022 (i.e. Federal Budget night). That is, listed public companies which had announced their off-market buy-back to the market prior to 7.30pm on Federal Budget night will be effectively grandfathered and able to carry out their off-market buy-back under the existing rules.  

The exposure draft includes an additional integrity measure that will apply in respect of distributions paid in conjunction with selective share cancellations. 

As this measure, once enacted, will have retrospective effect in relation to buy-backs and selective share cancellations undertaken by listed public companies that are first announced to the market after 7:30pm on Federal Budget night, it is important that all affected entities are aware of the impact of these measures and factor in the consequences for shareholders when undertaking capital management strategies. 

In Detail

The exposure draft legislation seeks to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the tax treatment of on-market share buy-backs. 

It does this by specifying that where a listed public company undertakes an off-market share buy-back of a share or non-share equity interest, no part of the buy-back price will be taken to be a dividend. This outcome is similar to the treatment that currently applies to on-market buy-backs, where all of the buy-back consideration is treated as consideration for the sale of the share or non-share equity interest.

Similar to the current treatment for on-market buy-backs, the exposure draft also provides that if a listed public company undertakes an off-market buy-back, a franking debit will arise in the company’s franking account equal to the debit that would have arisen if the company had been able to complete an off-market buy-back under the existing rules (i.e. to the extent the buy-back price is not debited to the company’s share or non-share capital account). The current accepted practice, based on the Australian Taxation Office’s Practice Statement PS LA 2007/9, is that a company can choose to debit all of the on-market buy-back price against its share capital - it should be confirmed that this practice can continue, at least in the explanatory memorandum. 

Additionally, in an integrity measure that was not flagged in the Budget announcement, distributions by a listed public company that are considered “consideration for'' the cancellation of a membership interest as part of a selective reduction of capital will now be treated as unfrankable distributions, with a franking debit still arising in the company’s franking account. This integrity measure is intended to prevent listed public companies from using selective capital reductions (including, but not limited to, selective capital reductions under the Corporations Act 2001) to achieve similar results to those under the current off-market buy-back rules (these transactions are not considered to be a buy-back for tax purposes as the shares are cancelled, not bought-back). The draft explanatory memorandum does not include substantive guidance as to when distributions will be seen as “consideration for'' the cancellation of a membership interest. Finally, equal access share cancellations will not be subject to this integrity rule.  

The Takeaway

Although it is unlikely that these measures will be enacted into law until 2023, because the measures will apply retrospectively to Federal Budget night, listed public companies will need to actively consider their capital management strategies, particularly in light of the other integrity measure dealing with franked distributions and capital raisings which is yet to be implemented following consultation on draft law in September 2022. 

Although the exposure draft removes discounted off-market buy-backs as a capital management option for listed public companies, the changes may provide more flexibility for those companies with higher share capital balances relative to their market value, allowing a share buy-back to be completed more efficiently than is currently possible on-market (with shareholders still receiving full capital treatment of the proceeds). 

Combined with the proposed changes for franked distributions and capital raisings, the capital management “tool kit” for listed public companies has changed substantially. 

Comments can be made on the draft law by 9 December 2022. Please contact us if you would like to discuss further. 

Contact us

Paul Abbey

Partner, Corporate and Global Tax, PwC Australia

Tel: +61 418 505 883

Sarah Hickey

Financial Services Tax Leader, PwC Australia

Tel: +61 2 8266 1050

Trinh Hua

Sydney Markets Leader, PwC Australia

Tel: +61 404 467 049

Adam Vassilieff

Partner, PwC Australia

Tel: +61 2 8266 7337

Richard Hendriks

Partner, Tax, PwC Australia

Julian Pinson

Partner, Financial Services - Tax, PwC Australia